The Importance of Life Insurance
Would your family be financially secure upon your death? It’s not a fun topic to think about but if you’re not sure then you will want to review your life insurance policy.
Insurance is the fine point between making sure you have enough coverage without overpaying for it. So who needs it and how do you know you have enough? In this post I’ll share an overview of what life insurance is, what type of policy you should have and who should be covered under life insurance in your family.
Do I Need Life Insurance?
The purpose for life insurance is to replace your income after your death. If you have a spouse or children living in your home that depend on your income, then you will need life insurance unless you are self-insured.
Self-insured basically means that you have enough money in investments and savings for your loved ones to live off of. This means you have zero debt, including the house and have plenty of money in savings and investments. Your family will be able to live off of your non-retirement investments.
There are 2 basic types of life insurance policies and yes, one is better than the other.
Term vs. Cash Value
Term insurance is your least expensive and best type of policy. It is called term insurance because it is for a specific period of time, such as 20 or 30 years. They do not include any type of savings plans attached to them.
Cash Value (or sometimes called whole life or universal life) is not set for a specific time, it is good for life. But it is also way more expensive because part of it funds a savings plan.
Why Is Term Better Than Cash Value?
Cash value may sound more appealing because “it’s for life” and it has a savings plan with it but in the long run you are losing money on much higher premiums AND you don’t get all your money back from the savings account. The insurance company keeps some of that money from the savings!
Insurance is not designed to be a savings account. You are much better off getting term insurance at a much lower premium and using any extra money you have to invest in non-retirement mutual funds that are likely to give you an 8-10% interest rate.
How Much Coverage Do I Need?
Your life insurance coverage should be about 10 to 12 times your annual income. For example, if your income is $50,000 a year, a 10x annual income with a 20 year term would give you $500,000. That would provide your family with $500,000 upon your death. At that point they can invest that money in a mutual fund where it will get about a 10% growth. You can also renew your policy if it is still needed past the term period.
Should a Stay-at-Home parent Have Life Insurance?
YES! A parent at home does have economic value to the household even if they don’t have an income. They are taking care of the kids and the house. When the responsibilities come down to one parent that parent might need extra help by paying for childcare or have someone come in to help with house duties.
Having income from a life insurance policy can help that single parent cover additional costs without added financial stress. It is suggested that the stay-at-home parent has $250,000 – $400,000 policy to cover extra expenses.
Do My Children Need Life Insurance?
Nobody wants to think about the possibility of losing a child. But the average funeral cost is $10,000. If you don’t have enough money in an emergency fund to cover funeral costs then you can add them onto your plan. They don’t need a separate plan. Our kids each have $10,000 coverage in our plan and it costs less than a couple dollars each month.
Having a small life insurance policy for your kids can relieve you of the added stress of funeral costs when you are already going through a rough time.
Switching From Cash Value To Term Life Insurance
If you currently have cash value insurance it is time to save yourself money and look into term insurance plans. Make sure your new term policy is in effect before you cancel your cash value policy.
Where Can I Get A Life Insurance Policy?
First, check with your employer or your spouse’s employer to see if life insurance is an option in their benefits package. If life insurance is not included in their benefits package then look for an independent insurance agent. An independent insurance agent is not tied to a specific insurance company. Their job is to shop around various insurance companies to find the best rate for your insurance needs.
Conclusion
Life Insurance is an inexpensive way to protect your family from financial hardship after a loss of a loved one. If you don’t currently have a life insurance policy for you and your family members, or you want to review your current policy, put that at the top of your to-do list. Reviewing life insurance is one of the tasks on my free Financial Wellness Checklist. Download the checklist today as a great reminder to update your policy!
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